7 Mistakes You’re Making With Your Purchased Services Spend

Purchased services spend is one of the most overlooked opportunities to identify major cost savings for your hospital. As margins are squeezed and patient care is at increasing risk of being compromised, we’ve identified the 7 mistakes your hospital may be making with your purchased services spend.

Purchased services is that part of your organization’s spend that is contracted, purchased from or outsourced to a third party vendor, rather than carried out by your hospital’s in-house team.

Mistake #1: Underestimating how much money is tied up in your purchased services spend

Almost one in five US hospitals are ‘in bad shape’ financially, or at risk of closure and many are missing out on the hidden cost savings in their purchased services spend that could drive margin improvement.

What most healthcare systems don’t realize, because they lack visibility into their costs, is that purchased services spend can account for between 40%-50% of your non-labor costs.

This becomes more complicated as many hospitals don’t have a clear understanding of what purchased services includes. At VIE Healthcare Consulting, we categorize purchased services spend in six categories to provide a framework for cost analysis. These are:

The spend data relating to your purchased services cost savings is often difficult to obtain because the actual service is performed first, then billed retrospectively. This means every invoice can be different, leading to a higher chance of pricing inconsistency and errors.

The process of reviewing every line item detail in your invoices is too time-consuming for most organizations. Yet this is where errors in utilization, variation and pricing can occur in purchased services spend. Uncovering some of the utilization errors in your invoices also requires specialist knowledge of certain clinical areas.

Working with a consultant with a proven track record in purchased services spend enables your hospital to analyze all of the line item details to ensure all errors in invoicing are identified.

Mistake #3: Each department manages purchased services independently

In a pressured hospital environment, the tendency to operate in silos results in three common errors we frequently see at VIE Healthcare when carrying out a review of our clients’ purchased services spend:

Different departments in your hospital run contracts with the same vendor at different prices.

Purchased services contracts are often run on automatic annual renewals which are rarely, if ever, reviewed. This risk is higher when individual departments are unable to take full control of costs or operate in isolation.

Fluctuations in prices are frequently overlooked. In some cases, your hospital may not even be aware they exist.

This makes visibility of your purchased services spend difficult, if not impossible and represents a huge barrier to gaining accurate insight into where your dollars are being spent.

Mistake #4:Assuming your hospital is securing the best market prices from your GPO or vendor

It’s not unreasonable to assume that you are paying market competitive prices by working with a GPO or a third party vendor, but it is not necessarily correct. The purpose of GPOs is to reduce costs, increase competition and drive transparency in pricing. But I regularly see evidence to challenge that assumption.

While GPOs negotiate contracts with manufacturers, vendors, and distributors, hospitals do maintain the ability to make purchases outside of the GPO contracts. Negotiating in isolation is difficult as hospitals are likely to be charged higher prices but there is a growing trend towards hospitals negotiating directly with vendors to reduce their purchased services spend.

Mistake #5: Not bringing in outside expert resources to help

With the unrelenting pressure on margins, most hospitals don’t have sufficient bandwith or resources to commit to analyzing the complex detail in your purchased services invoices. Bringing in outside expertise to help frees up those vital resources to enable you to focus on patient care.

My advice is to be careful of who you choose to work with. The solution to identifying the cost savings in your purchased services spend isn’t as straightforward as introducing technology into the process.

In selecting a provider, look for:

A track record of achieving significant material cost savings.

A team of experts with hands-on experience of working with hospitals and healthcare systems.

A defined and proven process that identifies the hidden costs in your invoices.

Documented, real success in all areas of purchased services spend.

At VIE Healthcare we have worked with healthcare organizations since 1999 to identify areas for cost savings in non-labor spend and saved our clients millions of dollars through our proven automated system Invoice ROI™.

Mistake #6: Jumping to benchmarking before analyzing the costs

Most hospitals use benchmarking to assess their performance against their competition. This is an essential part of the process and I recommend that all healthcare systems consult with a third party for industry pricing benchmarks for all categories of purchased services. But mistakes are made by moving too quickly to benchmarking, optimization and variation.

The first step to identify the hidden cost savings in your purchased services is line item analysis.

Line item analysis of your purchased services spend is where significant opportunities for cost savings can be found, which are often the result of pricing errors or off-contract spend.

In some cases, up to 30% of hospital purchased services spend is either not detailed on the contract or does not match contract pricing.

Our approach begins with the line item reconciliation of all of your purchased services vendors, taking a deep dive into the past 12-18 months of invoicing data. Our team of experts dig deeper than the average AP spend to compare market pricing and trends and identify millions of dollars in cost saving opportunities.

The results achieved through our Invoice ROI™ line item analysis cannot be achieved with AP spend.

Mistake #7:Assuming you have the necessary skills to carry out negotiations of purchased services in-house

The high volumes of contracts needed for every hospital means that negotiation is essential to secure market competitive pricing. To achieve this and realize cost savings requires a high level of negotiation skills.

While most hospitals are keen to negotiate with their purchased services vendors, most don’t have the in-house expertise necessary to negotiate with highly skilled and highly trained professionals. The outcome often results in your organization paying more in every category of your purchased services, which can affect the quality of patient care.

An experienced provider can negotiate with vendors on your behalf to maximize cost savings while preserving your relationships with those companies. VIE Healthcare also offers negotiation training to empower your healthcare team and hold your vendors accountable.